| Abstract: | This paper considers the question of how much time and effort should be spent in preparing a bid for a single item of known value sold at a first-price sealed-bid auction. A decision-theoretic approach to this bid decision summarizes the decision maker's knowledge of the competitive environment through his or her subjective probability distribution of the highest competing bid. Research activities such as collecting and analyzing bid histories are efforts to obtain additional information that reduces the uncertainty in the highest competing bid. The decision-theoretic concepts of expected value of perfect and imperfect information are used to place an economic value on such research activities. The results presented allow the decision maker to quantify the expected value of imperfect information when the uncertainty is normally distributed. The results show that additional research is most valuable prior to auctions the bidder expects to win. |
